2/05/2009 @ 12:01AM

The Bailout Bonus Smackdown

As the stimulus debate has picked up speed, Tom Friedman has aptly summed up the challenge we face in responding to the multifront economic crisis by saying, “We’re going to need a bigger boat,” paraphrasing a favorite line of mine from the movie Jaws.

Today, given all the recent indicators that common sense in our power elites has jumped the shark, I’d like to offer a corollary conclusion: We’re going to need a bigger 2×4.That is, to collectively smack Wall Street and Washington into reality.

Seriously, after all the bailout brouhahas from last year and the outrage they generated, the run of mass cluelessness and insensitivity we have seen over the last two weeks has been mind-boggling. Big banks on the brink of collapse rewarding the folks who put the country on the brink of depression with $18 billion in bonuses.
Citigroup
going a tone-deaf step further in buying a $50 million luxury jet. The House speaker claiming with a straight face that federal spending on contraception is vital to our economic recovery.

And then comes the Daschle tax fiasco, following the Geithner tax fiasco and coinciding with the Killefer tax fiasco. That would be McKinsey star Nancy Killefer, Obama’s pick for the newly created post of chief performance officer, who forgot to perform the basic duty of paying taxes on her nanny. Forget about how these folks were vetted for their finances–how were they vetted for their judgment?

Galling as this all is, what’s even more troubling is the excuses for this behavior we have repeatedly heard from many others in the power elite–especially over the Wall Street bonus scandal.

These apologists are trying to convince the public that the fuss over bailout bonus babies and their eye-popping perks is overblown and irrelevant to rescuing the economy. But in reality, they are reminding the public of just how out of touch their class is, as well as how pervasive the culture of entitlement is in their precincts. More important, they are also reinforcing the growing trust deficit in this country at the worst possible time.

One of the best examples of this out-to-power-lunch phenomenon came from CNBC “it girl” Erin Burnett. Appearing last Sunday on Meet the Press, Burnett offered this rather condescending rationalization of the $18 billion bonus bonanza.

“I understand the outrage, and you understand the populism. There are, though–well, how should we say this? The taxpayer money is not being used to pay the bonuses. I think people could understand if you work for a company–right? If the three us worked for a company, your guests, and I lost $10 billion, but Steve over there, he made a billion dollars. So overall the company actually loses money, but Steve went and did his very darndest for that company and he made money. So should he be paid for his work? That’s essentially what we’re talking about here. And reasonable people could argue about this, but many reasonable people would conclude, yes, he should be paid for that.”

Listening to Burnett’s fuzzy logic and clear obliviousness to why average Americans are outraged, it’s not hard to understand how the massive fraud that Wall Street engaged in went undetected for so long by the supposed watchdogs in the business press.

The public is not confused about how the bailout money is being used. They plainly see that the same corrosive selfishness that blinded Wall Street to the supremely reckless bets being made–and that helped to destroy our economy–is still very much the norm. And the public is furious at the idea of entrusting more of our money to a group of greedy daredevils who seem bent again on endangering us to enrich themselves.

Indeed, as many of us pointed out after the Big Three’s corporate jet scandal, this is not about bad PR–as Burnett, Larry Lindsey, Tony Blankley and many other supposedly expert TV talking heads have recently suggested. It’s about bad business.

For years these banks have been rewarding executives and traders based on phantom profits and urging them to be even more irresponsible in the process. And now, with their companies disintegrating for the want of taxpayer support, they are still following the same fundamentally flawed and morally obscene compensation model.

In this sense, it is immaterial whether Burnett’s “Steve”–she was referring to fellow panelist Steve Forbes with no apparent irony–performed well. The Wall Street employer in her (hypothetical) example is a disaster, as are most of its competitors. They have no money–except for the cash the American people lent them with great reluctance. And how do they repay our trust? By showering million-dollar payments on thousands of people that don’t need it, in a year their companies lost billions.

That’s not just insensitive–it’s incomprehensible. What kind of businessman worth his salt would treat his bankers and investors with such disregard and profligacy?

And frankly, it’s unpatriotic. It’s one thing for the big banks to be blind to the damage they were doing by pumping up the subprime market with junk loans and phony collateralized debt obligations and handing out multimillion-dollar bonuses like they were tissues when times were flush. It’s quite another to continue being so irresponsible and self-centered after the harm they have done has been abundantly exposed, their country is in crisis and confidence in the banking system is in tatters.

This is an all-hands-on-deck moment for America, and yet Wall Street is still operating in hoard-all-you-can mode. I could not believe how many bankers, when asked about the seemliness of getting $18 billion in bonuses after all that’s happened, responded by repeating the stock Street mantra, “You eat what you kill.” Really? Well, now that you killed the economy, maybe instead of getting a bonus, you might understand why average Americans would prefer you to eat crow–or the mortgages that they now can’t afford due to the scams from which you profited.

These guys really don’t get it. They particularly don’t get how the much-cited crisis of confidence is really a crisis of confidence in them–and how deep that mistrust goes. Just look at the Edelman Trust Barometer that was released last week, which found that public trust in business has dropped 20% over the last year, and is at a lower level than in the aftermath of Enron, the dot-com bust and 9/11. Only 17% say they trust the information that CEOs provide.

“It has been a catastrophic year for business, well beyond the evident destruction in shareholder value and need for emergency government funding,” said Edelman CEO Richard Edelman. “Our survey confirms that it’s going to be harder to rebuild our economies because no institution has captured the trust that business has lost–trust is not a zero-sum game. Business must recast its role in society and move beyond simply generating return on investment to its shareholders. It must partner with government and other institutions to assume societal responsibilities.”

Few Washington power players seem to grasp the severity of this problem. Fortunately, President Obama is one of them. Yes, he blew it on the Daschle nomination, revealing his own tone-deaf tendencies. But in a refreshing departure from his recent predecessors, Obama quickly and emphatically owned up to his mistake, making good (at least for now) on his promise to lead a new era of responsibility. Moreover, he showed that he understands how tenuous the public’s trust in its leaders and institutions is at this pivotal moment, going out of his way to reassure taxpayers that “there aren’t two sets of rules.”

The president made an even more consequential statement Wednesday with his plan to limit executive pay, the latest in a lengthening line of necessary evils. To be sure, I think it’s a terrible idea in concept, as a matter of economics. Capping executive pay at some arbitrary number does set a troubling precedent, as many critics have argued, and creates a slippery slope. But in practice, as a matter of politics, the abdication of responsibility by the big banks left Obama with no strategic choice but to fill this vacuum.

That’s because the president will likely be seeking another round of bailout funding soon. And it simply won’t be possible for him to win public support for a Troubled Asset Relief Program sequel–given the bipartisan backlash the original $700 billion rescue plan has understandably generated–without some kind of ban on the “shameful” payouts Obama denounced last week.

The cynics among the power elites will likely see this play as political grandstanding. But the American people will just as likely see it as moral smackdown that’s long overdue. And they may soon find that the $500,000 cap is just the right 2×4 we need to get Wall Street’s attention and cooperation.

Dan Gerstein, a political communications consultant and commentator based in New York, is the founder and president of Gotham Ghostwriters. He formerly served as communications director to Sen. Joe Lieberman, D-Conn., and was a senior adviser on his vice presidential and presidential campaigns. He writes a weekly column for Forbes.com.